Understanding Cost to Company

One of the most commonly used terms by companies, yet least understood by its employees is “Cost to Company” or CTC. The CTC, as quoted by employers and the take home pay are two different amounts. Also salary hikes in the form of an increased CTC doesn’t necessarily increase the monthly salary payout. So what exactly is this CTC and as an employee what all are you entitled for? This article aims to clarify the confusions that often arise in people’s minds when it comes to salary structures.

Demystifying Cost to Company

The Cost to Company (or CTC) refers to the total expenditure a company would have to incur to employ you. It includes monetary and non-monetary benefits, such as monthly pay, training costs, accommodation, telephone, medical reimbursements or other expenses, borne by the company to keep you employed. The total CTC as quoted by the company need not be the actual salary in hand at the end of the month. It therefore is simply a sum of various components put together.

Components of CTC

Companies these days offer various attractive components in the CTC to retain and boost the morale of the employees. Where some salary components are fully taxable some are fully tax- exempt. The composition of your CTC and a few of its components could be grouped as below.

1) Fixed Salary – This is the major part of your CTC and forms part of your monthly take home. It commonly consists of:

Basic Salary: The actual pay you receive for rendering services to the company. This is a taxable amount.

Dearness Allowance: A taxable amount, this is paid to compensate for the rising cost of living.

House Rent Allowance (or HRA): Paid to meet expenses of renting a house. The least of the following is exempt from tax with regards to HRA.

Actual HRA received

50% of salary (basic + DA) if residing in a metropolitan city, or else 40%

The amount by which rent exceeds 1/10th of salary (basic + DA)

Conveyance Allowance: Paid for daily commute expenses. Up to an amount of Rs. 800 per month is exempt from tax.

2) Reimbursements- This is the portion of your CTC which is paid only as reimbursements through billed claims.

Meal coupons: Many companies provide their employees with subsidized meal coupons in their cafeterias. Such costs incurred by companies in the form of subsidies are included in the CTC. Meal coupons are tax exempt provided it is not in the form of cash.

Mobile/Telephone Bills: Telephone or mobile expenditure up to a certain limit is reimbursed by many companies on the basis of a billed claim, and is a taxable amount.

Medical Reimbursements: Paid either monthly or yearly, for medicines and medical treatment. The entire amount is taxable. However, up to Rs. 15,000 could be tax exempt, if bills are produced.

3) Retirement Benefits- This component would be available to you only on retirement or resignation.

Provident Fund: Employers contribute an equal 12% to the provident fund account. This contribution (plus your contribution) to the PF account, though received only on retirement or resignation, is an expense incurred by the company every month and thus is included in the CTC.

Gratuity: Companies manage gratuity through a fund maintained by an insurance company. The payment towards the gratuity annually is sometimes shown in CTC.

4) Other Benefits and Perks

Leave Travel Allowance: It is the cost of travel anywhere in India for employees on leave. Tax exemption if allowed twice in a block of four calendar years.

Medical allowance: Some companies offer medical care through health facilities for employees and their families. The cost of providing this benefit to the employee could also form part of CTC.

Contribution to Insurance and Pension: All premiums paid by companies on behalf of employees for health, life insurance and towards Employees Pension Scheme, could form a part of the CTC.

Miscellaneous Benefits: Other perks which companies include under CTC could be electricity, gas, servant, furnishings, credit cards and housing.

5) Bonus: This is the benefit paid on satisfactory work performance for employee motivation. Though this amount is not assured to the employee, most companies include the maximum amount that can be paid as bonus, to the CTC. The two types of bonuses that are normally paid out are:-

Fixed Annual Bonus: Paid on the basis of employee performance, either monthly or in most cases annually, it is a fully taxable amount.

Productivity Linked Variable Bonus: Complete bonus amount is paid only on 100% achievement of target, nevertheless it still is included as part of your CTC.

Having understood what CTC is:

We must understand that an attractive CTC does not necessarily indicate a heavy monthly take home. Each company too has its own way of calculating the cost to company. One must take time to find out what the actual benefits are. Always ask for the break-up of the CTC so as to know what you are entitled for. If you are just joining the company, you could try to negotiate with the HR as to opting out of some facilities in exchange for increasing the take home. Understand the expenditure limits on LTA, and medical allowances and use them smartly.